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Washington is a community property state, which means the spouse of a business owner holds a 50% ownership interest in his or her spouse’s business as part of the married couple’s community estate. In cases of divorce, this means that the non-owner spouse could be awarded 50% of his or her spouse’s interest (stock) in the business as part of a property settlement. In the case of death, most of the time it means the non-owner spouse will obtain 100% of the deceased spouse ownership interest (stock) in the business.
Companies your size typically require the owners to actually work in the business for the company to function. The owners have full-time jobs in their business. So this comes into play in divorce, disability or death situations. As harsh as this may sound, most business owners do not want to be in business with a non-owner spouse of their partner. The non-owner spouse often knows very little about the business and cannot participate as a true owner. Plus, the non-owner spouse often has his or her own career that they prefer over being a business owner. So, in a Shareholder Agreement, we often adds language that says: In the case of divorce, the divorcing spouse will pay cash to his or her spouse in the property settlement (as opposed to the spouse being given actual stock in the corporation in the property settlement). In the case of death, the remaining business owners will buyout the surviving spouse. Life insurance is often used to fund this. In the case of permanent disability, the remaining owners will buy-out their disabled partner because they need to get someone in to fill the shoes of the disabled owner. Disability insurance can be used to fund this, but it’s expensive. We ask the non-owner spouses to sign off that they understand and agree to all of this. Contact Mark D. Walters Some business owners opt for "S-Corporation" status for their corporation to help reduce the self-employed taxes they pay. There are are few rules that have to be met to do this. A corporation is S-corporation eligible if:
The business judgment rule shields a corporate director or office from liability as long as he or she acts in goof faith without a corrupt motive. Unless there is evidence of fraud, dishonesty, or incompetence, courts will generally refuse to substitute its judgment for the judgment of the directors or officers of corporations. As long as there is a reasonable basis that indicates the challenged translation was entered into with due care and in good faith, the business judgment rule will almost always carry the day and protect the officers and directors. The business judgement rule also applies to members of a limited liability company.
Shareholders that want to challenge corporate action, have an uphill battle due to the business judgment rule. Contact Mark D. Walters Early in my legal career, I worked on a case that went to the Court of Appeals in Washington. The case is captioned, Lloyd Enters., Inc. v. Longview Plumbing & Heating Co., 91 Wn. App. 697, 701, 958 P.2d 1035 (1998). In this case, we represented a contractor plaintiff and filed complaints against Berry, Inc. and Wade Berry, the president of Berry, Inc. Non-lawyer Wade Berry filed answers pro se on behalf of the corporation, meaning without a licensed attorney. Having a non-lawyer in the case was disruptive to the proceeding to say the least.
After sending multiple warnings to Berry Inc. and Wade Berry, we moved to strike all the documents filed by Mr. Berry acting for the benefit of the corporation. This because Rule 11 of the Washington Rules of Civil Procedure requires pleadings to be signed by a licensed attorney. After granting the motion, the trial court gave the corporation, Berry, Inc., 20 days to file an answer signed by an licensed attorney. When Berry, Inc. failed to comply, the trial court entered an order of default. On appeal, Division One of the Washington State Court of Appeals held that the trial court properly struck the documents for violation of Rule 11 because the corporation did not promptly cure the omission. The Appeals Court stated: "Because corporations are artificial entities that can act only through their agents, we agree with the general common-law rule, recognized by courts in other jurisdictions, including all federal courts, that corporations appearing in court proceedings must be represented by an attorney." The Court of Appeals explained the reason for its decision: "A shareholder who owns all or practically all of a corporation's stock is not entitled to sue as an individual because the shareholder cannot employ the corporate form to his advantage in the business world and then choose to ignore its separate entity when he gets to the courthouse." Contact Mark D. Walters  Owning and running a business can become overwhelming, and going it alone can be scary and unwise. It doesn’t have to be this way.
Many privately held businesses do not have a Board of Directors to guide the owners and help grow the business. These companies can benefit greatly from having a professional Advisory Board to help the owners and management with business strategy, decision-making and risk management. Working with non-lawyer industry experts, such as CPAs, HR Professionals, CPAs, Payroll and Compensation experts, Sales and Marketing Consultants, Mark can help you form an Advisory Board for your business to bring objectivity, perspective and experience to the table and help the owners focus and on the business issues at hand and grow the business more profitably. With decades of experience, and a diverse range of industry contacts to call upon, an Advisory Board can help management accelerate growth, avoid costly mistakes, make better decisions and transform confusion into confidence. Contact Mark D. Walters |